Federated plans to buck the tide on money funds

Oct 17, 2010 @ 12:01 am

By Jessica Toonkel

Some asset management executives would argue that now isn't a good time to be in the money market fund business.

Yields on money market funds have been close to zero for months. Regulators have tightened rules around these offerings, and the industry is looking at further regulation.

Nevertheless, J. Christopher Donahue, president and chief executive of Federated Investors Inc., thinks that it's not only a good time to be in the money market business, it's time to expand.

Mr. Donahue, whose firm had $336.8 billion in assets under management as of June 30, thinks that regulators' idea to impose capital requirements on money market funds could be detrimental to the industry and to investors.

In a recent interview, he spoke about how he plans to build up Federated's $260.5 billion money market business and his plans for the firm as a whole.

Q. On Sept. 23, Paul Volcker, chairman of President Barack Obama's Economic Recovery Advisory Board and former Federal Reserve chairman, said that he thinks that money funds need capital requirements. What do you think?

A. Think about what capital requirements would mean for JPMorgan Chase & Co., which has $400 billion in money funds. If they applied Basel 3 — which mandates a 7% capital requirement on banks — that would mean $28 billion of capital. It makes no sense. One of the reasons you need capital is, you are on leverage. The key thing about money funds is they are not banks; these are not deposits. Money funds don't fail like banks.

Q. The Investment Company Institute has been working on developing a bank that would provide additional liquidity to prime money market funds and would be capitalized by the industry. What is the status of that project?

A. I think it's moving ahead. I am not in the position to tell you where the Federal Reserve and Treasury Department are on the issue, but we have people on some of the working groups within the ICI, and they have had very good meetings. We think it's a very good idea. There is a huge issue with liquidity.

Q. Federated recently bought SunTrust Banks Inc.'s $17 billion money market business. Are you looking at more acquisitions in the money market arena?

A. Yes. From our perspective, anyone who isn't in the top 25 on the money fund list is someone who can seriously consider turning their money fund business [over] to us.

Q. But with everything going on, why would you want to build your money fund business now when it isn't making money?

A. A number of years ago, there were 300 firms doing money market funds. Now there are 150. We realize that because of [fee] waivers, the economics are not as attractive as they should be, but when you are doing things over the course of decades for customers, you wait and see.

Q. Are you looking at acquisitions outside the money market area?

A. Even more so. We have announced that we are looking internationally for a firm that has excellent management and a global-distribution footprint. Everything that goes by, we are looking at.

E-mail Jessica Toonkel at jtoonkel@investmentnews.com.

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